Sun Sep 20, 2009
UBS Tax Net Snares Clients of Credit Suisse, Julius Baer, LGT
UBS AG’s $780 million settlement with U.S. authorities to avoid prosecution for helping Americans cheat on their taxes has opened a Pandora’s box for banks worldwide.
A U.S. tax program encouraging UBS clients to avoid criminal inquiries by declaring offshore accounts before Sept. 23 is prompting a flood of disclosures by customers of Zurich-based Credit Suisse Group AG and Julius Baer Holding AG, LGT Group in Liechtenstein, London-based HSBC Holding Plc, and Bank Leumi Le-Israel Ltd., tax attorneys said.
That may give the Internal Revenue Service ammunition to target other overseas wealth managers as it seeks to crack down on tax evasion. UBS, the largest Swiss bank, avoided prosecution on Feb. 18 when it admitted helping Americans dodge taxes, paid a $780 million penalty, and disclosed secret data on 250 clients. In August, UBS agreed to reveal another 4,450 clients to settle a U.S. lawsuit seeking more data.
“It is very possible that the IRS will be able to get strangleholds over the other banks because they’ll have specific information which will permit them to bring specific allegations of wrongdoing before the U.S. courts,” said Robert Fink, an attorney at Kostelanetz & Fink in New York. “This thing may spread like wildfire.”
The disclosure program and the U.S. lawsuit settled by UBS are helping the U.S. squelch offshore tax evasion by pursuing financial institutions and intermediaries including law firms, IRS Commissioner Doug Shulman said Aug. 19. The U.S. loses $100 billion a year through offshore tax evasion, estimated U.S. Senator Carl Levin, a Michigan Democrat.
Bahamas, Granada
Fink, whose firm handled more than 250 disclosures, said his clients told the IRS about accounts at a dozen Swiss banks, as well as banks in Germany, England, Italy, Belgium, Singapore and Hong Kong. Lawrence Horn, an attorney at Sills Cummis & Gross in Newark, New Jersey, said his clients declared accounts at Bank Hapoalim Ltd. in Israel, as well as banks in the Bahamas, Granada and the Cayman Islands.
After UBS customers, account holders at Zurich-based Credit Suisse are the largest group of people coming forward to the IRS, said Fink and Scott Michel, a lawyer at Caplin & Drysdale in Washington.
“We strongly believe we have the right compliance standards in place and adhere to all applicable laws,” David Walker, a Credit Suisse spokesman, said in an e-mail.
Karina Byrne, a UBS spokeswoman, didn’t immediately return a call seeking comment.
Representatives of LGT Group, Bank Hapoalim and Julius Baer couldn’t immediately be reached for comment after regular business hours yesterday.
Juanita Gutierrez, a spokeswoman for HSBC, and Chaim Fromowitz, a spokesman for Bank Leumi USA, declined to comment.
Prosecution Risk
Thousands of Americans must decide by Sept. 23 whether to disclose accounts to the IRS and possibly face back taxes, fines and penalties, or keep their assets undeclared and risk criminal prosecution. The Justice Department so far has prosecuted two UBS bankers, five of its U.S. clients, a Liechtenstein adviser, a Swiss lawyer, and a manager at Zurich-based Neue Zuercher Bank.
“The question is whether the U.S. government is going to make the same effort to get the names of account holders at Credit Suisse, Julius Baer and LGT that it did at UBS, and if not, why not?” Horn said.
Taxpayers making voluntary disclosures and third parties are “providing us with useful information” every day, said Frank Keith, an IRS spokesman, in a written statement.
Offshore Accounts
“This includes how undisclosed offshore accounts came to be set up and the identities of those who assisted in these efforts to circumvent U.S. tax laws,” Keith said.
Taxpayers must reveal names of bankers, financial advisers and others who helped hide assets from the IRS, Michel said. He said he expects the IRS to create a database to find patterns.
Coming forward voluntarily usually allows a taxpayer to avoid criminal charges, although all applications for leniency will be screened by criminal investigators, the IRS said in March.
“I have a pretty clear idea that they’ll set their sights on the next level of Swiss banks,” said attorney Robert McKenzie of Arnstein & Lehr in Chicago, which represents 65 clients making disclosures.
Switzerland, which manages an estimated 27 percent of the world’s privately held offshore wealth, agreed in March to cooperate with foreign authorities on tax-evasion probes to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development.
Disclosure Rush
The IRS deadline has set off a rush of disclosures, with tax attorneys estimating that more than 3,000 U.S. taxpayers have filed paperwork with the IRS since the program was announced in March. The IRS hasn’t said how many people have applied to file voluntary disclosures.
“I feel like I work in a bakery where I ask people to take numbers,” Fink said. “I have never seen such a deluge. I was thinking of getting folding chairs in our reception area.”
Some potential clients have been skittish about revealing their identities to him, with one wearing “massive sunglasses and a red wig which was so artificial that it must have been bought in a five-and-dime store,” Fink said.
Fink said most of his clients have offshore assets of $1 million to $5 million, with four exceeding $100 million.
McKenzie said some of his clients inherited accounts set up by parents or grandparents in other countries. They include political refugees who fled Vietnam and Iran as well as descendants of Holocaust survivors, he said.
Cash Hoard
“There was a mentality among direct descendants of Holocaust survivors that you should have a cash hoard somewhere else in case the United States becomes the next fascist enterprise,” he said.
While lawyers suggest the IRS should extend the Sept. 23 deadline, they urge clients with undeclared accounts to come forward.
“You’ve got to be crazy not to come forward,” said lawyer Charles Falk, who practices in Mendham, New Jersey. “If you are found out, they’re going to prosecute you and take all your money and make your life miserable. For your own sanity, you’d be well advised to come forward.” (Source: Bloomberg)
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Treasury ends backing for money market mutual funds
In one of its largest phase-outs of a government economic rescue plan to date, the Treasury Department officially ended its year-old program to guarantee money market mutual funds, the department said Friday.
The guarantee program was established a year ago after one of the largest money market mutual funds, the Reserve Fund, suffered a run on its assets due to losses connected with Lehman Brothers’ failure. The mutual fund announced that its net asset value had “broken the buck,” by falling below $1 per share as a result of the credit crunch.
The government’s guarantee program helped stabilize fund assets and restored confidence in the sector as investors began adding more cash to the funds.
“The guarantee program for money market mutual funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers,” Treasury Secretary Timothy Geithner said. “As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well.”
Treasury has had no losses under the program and earned roughly $1.2 billion in participation fees. (source: MarketWatch)
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U.S. housing agency acts to bolster reserves
The Federal Housing Administration on Friday announced a series of credit policy changes to help rebuild reserves falling below congressionally mandated levels, saying it won’t need a taxpayer bailout.
Nor will it will raise fees on loans made by FHA-approved lenders to homebuyers.
FHA Commissioner David Stevens said the draft of an independent actuarial study to be presented to Congress in November shows the FHA’s capital reserve ratio dropping below a congressionally mandated 2 percent.
But he said that will not require an injection of money.
“The fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action,” Stevens said. But he said that given the FHA’s vital role in the housing market, policy changes were needed to ensure that lenders are well protected.
Stevens said the FHA has total reserves of more than $30 billion, representing about 4.4 percent of the book value of its business, and said the reserve fund the actuarial study is looking at is “a secondary cushion.”
The FHA has guaranteed about a quarter of all U.S. home loans made this year and needs reserves as a cushion in the event of losses. Stevens said about 80 percent of its business is with first-time homebuyers, who typically have smaller down payments, so the agency’s role in the housing market is vital.
He said the actuarial study forecasts that recovery in the hard-hit housing sector, particularly in home prices, will come later than previously thought, with prices remaining weak into early 2010.
But as markets gradually improve, the FHA reserves should reach the 2 percent threshold once more within about two years even if no credit policy changes were made.
Financial markets on Friday took the FHA announcement in stride.
FHA-insured mortgages and loans from the Veterans Administration, both carrying full faith and credit guarantees from the government, are used to create Ginnie Mae bonds, which traded only slightly lower in price.
Among the changes announced on Friday, the FHA said it intends to hire a chief risk officer for the first time in its 75-year history to concentrate efforts at managing and reducing risk to the FHA’s insurance fund.
It is also boosting “net worth requirements” that mortgage companies must meet, a change that may ultimately thin out some marginal operators. Stevens said the FHA wants its lenders and brokers have “skin in the game” by ensuring they have a long-term interest in the performance of loans they originate.
The requirement currently calls for a lender using FHA guarantees to have a net worth of $250,000. But FHA’s parent department, the U.S. Department of Housing and Urban Development, is proposing to boost that to $1 million and may put it higher in coming years.
As well, mortgage brokers will have to work through approved FHA lenders in order to offer FHA-insured loans rather than being able to originate such loans on their own.
“These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund,” Stevens said. (Source: Reuters)
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Wed Sep 16, 2009
US Stocks Hit New ‘09 Highs As Bernanke Says Recession Is Over
U.S. stocks pushed higher Tuesday, reaching new highs for the year, after Federal Reserve Chairman Ben Bernanke said the recession is likely over.
Stocks had drifted around the flat line for much of the morning as new measures of retail sales and New York-area manufacturing came in better than expected, but wholesale-level inflation was surprisingly strong.
The market ticked up higher in the early afternoon, however, as Bernanke said that, from a technical point, the “recession is very likely over at this point.” The Fed chief made his comments during a question-and-answer session at the Brookings Institution.
The Dow Jones Industrial Average recently rose 45 points to 9672, with Alcoa, Caterpillar and General Electric leading the gainers. At its intraday high, the index reached 9694.07, its highest point since Oct. 14.
The Nasdaq Composite Index and the S&P 500 also reached intraday highs for the year. Recently, the Nasdaq Composite Index was up 0.4%. The S&P 500 rose 0.2%, helped by a 2% gain in its materials sector and 1% rise in industrials.
Helping boost the metals stocks, gold futures closed at a new Comex record high of $1,005 Tuesday, up $5.10 per troy ounce. Gold’s recent ascent has coincided with the weakening dollar, a trend that continued Tuesday as the euro hit a new nine-month high against the U.S. currency.
The gains for industrials and materials come as rising sentiment surrounding the global economy has helped conglomerates in both sectors. For those investing in the sectors, real business growth may not be coming very quickly, considering the still-weak global economy, though the stock gains show some investors are willing to look past near-term returns.
“Industrial companies are looking pretty good, considering the economic trends, but they will certainly require some patience as we may be looking at 2011 until you see how they really did in the downturn,” said Eric Schoenstein, a principal with Jensen Investment Management.
Traders have generally been pleased with the moves in major indexes lately, with the Dow rising in six of the last seven sessions, and participants surprisingly eager to put their cash reserves to work since returning from summer vacations.
While volume has ticked up in the post-Labor Day period, as many analysts predicted, that trend hasn’t added much volatility. Instead, the market’s gains have been built steadily, despite September historically being a bad month for stocks. That has reinforced some bulls’ optimism that the rally could continue through year end.
“People don’t just return and put their money all in on day one,” said Jerry Kallas, managing director at the Chicago brokerage Terra Nova Financial. “We’re going through a process that’s still playing out. But, you know, you have to like the resilience that we’ve seen in this market.”
However, Tobias Levkovich, chief U.S. equity strategist with Citi Investment Research, still thinks some sort of a pullback is likely. “It’s hard for us to believe everything’s fine and we’ve cleared the decks,” he said.
Levkovich added that, as analysts continue to raise their estimates for third-quarter earnings results, he is concerned the market could be disappointed if the results fail to beat expectations as much as they did in the second quarter. He thinks such disappointment would be more likely to stall the rally than what month it is.
In economic news, retail sales soared 2.7% in August as car dealers received a big boost from the government’s “clunkers” rebate program while other merchants fared well in an unexpected sign of consumer resilience. While much of the sales gain came from cars and gasoline, other sales rose 0.6%; that was the second increase in six months within the ex-car, ex-gas category.
To be sure, retail chains are still contending with difficult conditions. Best Buy shares slipped 4.8% after the electronics chain said its fiscal second-quarter earnings declined a bigger-than-expected 22% as sales continued to fall and the company’s international business swung to a loss.
Elsewhere, data from the New York Federal Reserve suggested improvement in the manufacturing sector. The Empire State Manufacturing Survey’s business conditions index climbed to 18.88 in September, the highest level since late 2007, from 12.08 in August. The index hit a record low of -38.23 in March.
Also, U.S. producer prices rebounded sharply last month on the back of rising gasoline and other energy costs, though core prices posted only a slight gain. Price pressures deeper in the production pipeline moved up, as well, suggesting the possibility of higher prices down the road. The producer price index gained 1.7% in August, while core wholesale prices climbed 0.2%.
Treasury prices declined on the stronger-than-forecast economic data. The key 10-year note slipped to yield 3.45%. (Source: WSJ)
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Sat Sep 12, 2009
California ranks 3rd in August foreclosures
California had the third-highest foreclosure rate in the nation in August, down from second in July, according to RealtyTrac Inc.
A total of 14,590 California properties were in foreclosure in August, or one per every 144 households, according to data released by RealtyTrac, an Irvine-based marketer of foreclosed properties. That was down 14.6 percent from July and down 9.24 percent from August 2008.
Nevada had the nation’s highest foreclosure rate in August, or number of homes in foreclosure compared to total homes, with one in every 62 households in some stage of the foreclosure process RealtyTrac said. It was followed by Florida, California, Arizona, Michigan, Idaho, Utah, Colorado, Georgia and Illinois.
Nationwide, one in every 357 households was in foreclosure in August, down roughly a half-percentage point from July but up almost 18 percent from August 2008.
“The August report demonstrates that there is still an ample supply of properties filling the foreclosure pipeline even while the outflow of bank-owned REO [real-estate owned] properties onto the resale market is being more carefully regulated,” RealtyTrac CEO James Saccacio said in a statement.
“After hitting a high for the year in July, REOs dropped 13 percent in August, but we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time.”
RealtyTrac’s data covers foreclosure data in all three phases of foreclosure — default notices, scheduled auctions and bank repositions — according to the company. RealtyTrac collects data from more than 2,200 U.S. counties, which account for more than 90 percent of the country’s population.
(Source: BizJournals)
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Michigan Consumer Sentiment Increases
Consumer sentiment as measured by the Reuters/University of Michigan index rose to 70.2 in early September, above the 65.7 print in late August and the 67.3 level economists were expecting. After dipping in July and August, sentiment is now at a level just shy of the 70.8 level recorded in June, its highest since February 2008.
This month, sentiment was lifted in part by a 5.2 point jump in the current conditions index to 71.8, above the 67.5 economists expected. The index of consumer expectations rose 4.2 points to 69.2, above the 66.0 economists expected. Both component indices are at their highest levels since June. The late September survey put year-ahead inflation expectations at 2.6%, below the 2.8% recorded in late August. Consumers expected five-year inflation to average 2.9%, above the late August post of 2.8%.
Survey director Richard Curtin said that the data indicate that consumer spending will ‘remain tepid toward the end of 2009 and into the first half of 2010.’ The survey found that although nearly three in four consumers thought the economy was still in recession, just over four in ten expected the economy to improve in the year ahead, the highest proportion in five years. It seems that while consumers are seeing the light at the end of the tunnel, they are still expecting the same sluggish economic recovery that economists and leaders in Washington have projected. (Source: Reuters)
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Fri Sep 11, 2009
Morgan Stanley’s Mack to Hand CEO Job to Gorman
Sept. 10 (Bloomberg) -- John Mack, Morgan Stanley’s chairman and chief executive officer for more than four years, will hand off his CEO duties at the end of the year to Co- President James Gorman.
The change will take effect on Jan. 1, the New York-based firm said in a statement. Walid Chammah, co-president of the firm with Gorman, will give up that role and remain chairman of Morgan Stanley International in London. Mack said he told the board 18 months ago that he would like to step down as CEO after he turns 65 in November and remain as chairman.
“I’ll stay as chairman at least for two years working with James, working with clients,” Mack, 64, said in an interview today. “I’m not leaving this firm. This firm is part of my DNA.”
Mack spent most of his career at Morgan Stanley. He left in 2001 after more than 20 years before re-joining as CEO in 2005 and leading the firm through a financial crisis that wiped out Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. One week after Lehman’s Sept. 15 bankruptcy, Morgan Stanley and larger rival Goldman Sachs Group Inc. converted to bank holding companies, ending their history as independent securities firms to win the backing of the Federal Reserve.
‘Credit for Surviving’
Morgan Stanley shares fell as low as $9.68 on Oct. 10 before the firm won a $9 billion investment from Japan’s Mitsubishi UFJ Financial Group Inc. and $10 billion from the U.S. government on Oct. 13. Mack has since repaid the Treasury and the stock closed in New York today at $28.64.
“You’ve got to give him some credit for surviving,” said Kenneth Crawford, a senior money manager at Argent Capital Management LLC in St. Louis, which oversees $700 million. “The good thing is there’s an MS ticker on my screen that changes price each day, and there are a fair number of his peers that aren’t on my screen anymore.”
Morgan Stanley’s board considered external and internal candidates before deciding Gorman was best suited to become CEO, Mack said. In an interview today, Gorman said the firm’s strategy has already been set under Mack and that he hasn’t yet decided whom he’ll name as president.
Gorman, 51, joined Morgan Stanley in August 2005, less than two months after Mack became CEO, to run the retail brokerage division. He previously worked at Merrill Lynch & Co., now part of Bank of America Corp., which is Morgan Stanley’s biggest competitor in providing financial advice to individual investors.
Smith Barney Venture
Before Merrill, Gorman worked at strategy firm McKinsey & Co., where he advised financial clients including Merrill.
“Gorman’s reputation is a pretty good one,” Crawford said. “At Merrill, he was tasked with fixing their brokerage business and that was the crown jewel at Merrill Lynch.”
Earlier this year, Morgan Stanley agreed to buy control of Citigroup Inc.’s Smith Barney brokerage unit to form a joint venture called Morgan Stanley Smith Barney. The venture, in which Morgan Stanley holds a 51 percent share, has more financial advisers than any other retail brokerage.
Morgan Stanley’s financial performance has lagged behind peers in recent months. The firm reported its third consecutive quarterly loss for the three months that ended in June, while rival Goldman Sachs made record earnings led by trading gains.
Mack said the firm hasn’t embraced a strategy of taking fewer trading risks. He said that the company’s traders are more focused on dealing in liquid securities than they were before the crisis.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net
Last Updated: September 10, 2009 18:24 EDT
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Thu Sep 10, 2009
U.S. Consumer Credit Falls by a Record $21.6 Billion
08 Sep, 2009
U.S. Consumer Credit Falls by a Record $21.6 Billion
U.S. consumer credit plunged more than five times as much as forecast in July as banks maintained more restrictive lending terms and job losses made households reluctant to borrow.
Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.
Rising unemployment, stagnant incomes and shrinking household wealth are casting doubt on the strength of the economic recovery. The category of credit that covers car loans also plummeted by a record amount, even as the “cash for clunkers” auto trade-in program helped push up personal spending in July.
“The consumer is going to be hunkered down for a long time saving more and paying down the debt that took decades to acquire,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said. “Even cash-for- clunkers could not turn the credit picture around in July, although auto sales will surely boost non-credit card consumer debt in August.”
Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.
Credit Cards
Revolving debt, such as credit cards, fell by $6.1 billion in July, the Fed report showed. Non-revolving debt, including loans for automobiles and mobile homes, plunged by $15.4 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
Consumer spending rose 0.2 percent in July, following a 0.6 percent increase in June, government data showed on Aug. 28. Excluding cars, purchases were little changed.
Incomes were unchanged in July after dropping 1.1 percent in the prior month. The decrease in income in June reflected the fading boost from government stimulus-related tax cuts and transfers. Wages and salaries posted the first gain of the year in July, increasing 0.1 percent after dropping 0.3 percent.
Tighter Standards
Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007.
U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed on Aug. 17.
Most banks cited reduced risk tolerance and “a more uncertain economic outlook” as the main reasons for restricting credit to businesses, with 35.2 percent saying they “tightened somewhat,” the Fed said in its quarterly Senior Loan Officer survey.
Since the survey, economists have raised their outlook for economic growth as data suggested home sales and manufacturing were stabilizing, and the Fed has said that the economy is “leveling out.”
Jobless Rate
A Labor Department report last week showed payrolls in August fell the least in a year. At the same time, the jobless rate rose to the highest in 26 years, a reminder that hiring will take longer to rebound, restraining consumer spending.
The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.
Credit-card defaults fell in July after breaking records for five straight months, according to Fitch Ratings statistics released on Aug. 31. Charge-offs, the cost of loans that card issuers have given up on collecting, fell to 10.55 percent as consumer credit quality showed “signs of life,” Fitch said.
Defaults are less likely to rise in the fourth quarter, as they typically do, as delinquencies stabilize and monthly payment rates improve, according to Fitch.
“The economic situation may have caused some front-loading of losses this year,” analyst Cynthia Ullrich said Aug. 31 in a statement accompanying the release of Fitch’s Prime Credit Card Charge-off Index.
Sales of cars and light trucks rose to an 11.3 million annual pace in July, according to Woodcliff Lake, New Jersey- based industry research firm Autodata Corp, in part because of the government’s trade-in incentive program. Sales increased again in August to a 14.1 million annual pace, the highest since May 2008. That compares with February’s 9.1 million rate, which was the lowest since 1981. (Source: Bloomberg)
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Fed Beige Book Paints Glum Picture
Fed Beige Book Paints Glum Picture
Posted by: oet In: Financial Services
The Fed wants to state the economy is not only stabilizing, but also on the rebound. However, a look at the details of the report paint quite the opposite picture.
The only positive news from the Beige Book is coming from the manufacturing sector, which has seen an increase in orders. The improvements for the rest of the economy are mediocre at best and show a slowing of the decline rather than an increase in economic activity.
For example, the Fed states that retail sales remain stagnant with the only gains found in retailers specializing in inelastic consumer goods. Until consumers start branching out into the durable goods sector the growth in manufacturing orders will flatten again.
Future demand for durables look weak as consumer demand for additional credit has declined in most regions. Further, many regions continue to tighten the availability of credit which puts a limit on the amount consumers can spend in the near future.
Demand for nonfinancial services remain soft. There was a slowing of the decline in demand for services in parts of the country as legal services growth remains stunted. Healthcare services remain a bright spot as growth continues unabated.
The labor market continues to weaken in all districts. Mass layoffs have declined somewhat over the last few months. Firms have begun to look for new workers, but instead of attracting full-time employment they are seeking out temporary labor. If firms truly believed the economy was rebounding, they would forego temporary workers and attempt to lure some of the skilled unemployed for full-time work but at lower wages.
Finally, the construction sector continues to be a disappointment. The residential sector is seeing an increase in existing home sales, but increased supply continues to put downward pressure on prices. Nonresidential construction weakened further as most regions posted increased declines in activity. (Source: Briefing)
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12% of eligible borrowers helped by Obama plan
12% of eligible borrowers helped by Obama plan
Some 360,165 delinquent borrowers getting help, up from 235,247, or 9%, a month ago. Treasury wants loan servicers to do more.
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See all CNNMoney.com RSS FEEDS (close) By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 9, 2009: 4:17 PM ET
Is Obama's foreclosure rescue plan working?
Homeowners in trouble are having mixed results applying for President Obama's foreclosure prevention plan. CNNMoney.com readers tell us their tribulations and triumphs trying to get their loans modified or refinanced.
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NEW YORK (CNNMoney.com) -- Mortgage servicers have picked up the pace of loan modifications over the past month, after coming under fire for not doing enough to help troubled borrowers.
Servicers have placed 12% of eligible troubled borrowers into trial modifications under President Obama's foreclosure prevention plan, the Treasury Department said Wednesday.
The progress report, the second issued by the government, says that 360,165 homeowners who were at least two months behind in payments received relief through August. A month ago, just 9%, or 235,247 borrowers, were in trial modifications.
The program had gotten off to a rocky start, but officials said Wednesday that servicers should hit their goal of 500,000 loan modifications under way by Nov. 1.
"Our progress in implementing these programs to date has been substantial, but we recognize that much more has to be done to help homeowners," said Michael Barr, an assistant Treasury secretary, in prepared testimony before a House Financial Services Committee panel Wednesday.
The $75 billion initiative was announced in February and the first institutions to join began accepting applications in April. The plan, which is projected to help up to 4 million homeowners, calls for servicers to reduce the monthly payments of eligible borrowers to no more than 31% of their pre-tax income. Qualified borrowers are put into three-month trial modifications before the adjustment is made final.
Some 47 servicers are now participating in the Obama program, up from 38 servicers a month ago. Financial institutions, borrowers and mortgage investors all receive incentives for participating in the program.
Servicers' performance, however, was once again all over the map. Saxon Mortgage Services led the pack for a second month with 39% of its eligible delinquent borrowers in trial modifications, up from 25% a month ago.
JPMorgan Chase (C, Fortune 500) led the large banks with 25%, up from 20%, and Citigroup (C, Fortune 500) at 23%, up from 15%. Wells Fargo (WFC, Fortune 500) came in at 11%, up from 6%. Bank of America (BAC, Fortune 500) put 7% of its eligible borrowers in trial modifications, up from 4% a month earlier.
By releasing the servicers' progress reports each month, the administration is hoping to hold institutions responsible for their performance. The updates will allow the public to see which institutions are lagging in implementing the plan.
After the report came out last month, servicers acknowledged they needed to improve their performance and promised to do better in the future.
Wells Fargo said Wednesday that it has increased the number of its borrowers in trial modifications by 64% over the past month. The company expects to exceed its goal of putting 60,000 homeowners in trial adjustments by Nov. 1. It has 33,172 trial and final modifications underway.
Bank of America said it has doubled the number of its customers in the trial phase under the Home Affordable Modification Program to more than 68,000 since the last report.
"We are working hard and with a strong sense of urgency to ensure HAMP's success," Jack Schakett, the bank's credit loss mitigation strategies executive, said in prepared testimony.
Many borrowers, however, don't feel their servicers are on their side. They are complaining that servicers are not responding to their calls and applications, losing their paperwork or not making decisions. The financial institutions said they are ramping up their staffing and computer systems to handle the crush of applications.
Still, servicers need to continue bolstering their ranks and improving their training, Barr said.
"All servicers can do more than they are doing now," he said. "Servicers need to do a better job reaching out to borrowers."
0:00 /2:48Banks leave foreclosures hanging
The government is also implementing new measures aimed at improving the program, Barr said. Treasury officials are establishing codes that servicers will have to use for reporting denials to the administration and to borrowers. Many homeowners have complained they are denied without explanation.
Officials are also working to streamline application documents and develop Web tools where borrowers can get forms and check the status of their request. Servicers and housing counselors have said these steps can speed the process.
If servicers don't ramp up their efforts, Rep. Barney Frank, D-Mass., is willing to reintroduce legislation that would allow bankruptcy judges to lower the amount owed on primary residence. The financial services industry strong opposes this measure, which was defeated in the Senate this spring.
"The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages," said Frank, who chairs the House Financial Services committee. "And if they do not improve their performance, then they improve the chances of that legislation."
Despite the administration's and servicers' efforts, the housing market is still in trouble. The number of people falling behind on their payments continues to mount, especially as unemployment rises.
A record number of foreclosure filings were posted in July, according to RealtyTrac. There were more than 360,000 properties with foreclosure filings -- including default notices, scheduled auctions and bank repossessions -- an increase of 7% from June and 32% from July 2008.
First Published: September 9, 2009: 10:38 AM ET
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